Stagecoach, the major transport company, has been awarded the contract to run the South Western Trains franchise from February 2007, the Department for Transport announced today.

Stagecoach Group has agreed to pay the DfT a premium of £1.19m over the life of the 10-year franchise. The contract will be extended for the final three years, if Stagecoach's performance is good enough.

Stagecoach currently operates the South Western franchise and Island Line on the Isle of Wight, which are being consolidated into a single expanded South West franchise under the new contract.

The company said it expected the franchise, worth more than £53m in annual revenues, to generate an annual operating profit in the early years of the franchise of £15m to £20m, and an annual finance income of £3m to £4m.

The Stagecoach Group chief executive, Brian Souter, said: "We are delighted to be entrusted by the government with the contract to run the UK's most important rail franchise."

Under the terms of the contract, the transport company will invest £40m in stations including London's Waterloo, from where it runs services to Brighton, Southampton, Portsmouth, Bristol, Exeter and Plymouth. Stagecoach said that it would increase capacity by 21% on mainline services and by 21% on suburban services by operating longer trains.

It would also encourage more travel outside rush hour, increase security, introduce more flexible ticketing with smartcards by 2009, improve major stations including London's Waterloo, and introduce extra morning peak services between London and Basingstoke.